Wed, 16 Feb 2000

Strengthening economic dimensions

By Jose T. Almonte

This is the first of two articles originally presented at the Third ASEAN ISIS-IIR Dialogue held in Bangkok last month, organized by the Institute of Strategic and International Studies (ISIS), Thailand and the Institute of International Relations (IIR), Taiwan.

BANGKOK: The connection between East Asia's economic prosperity and its enhanced regional security is, by now, well- known. And we have only to recall how unstable the region once was to realize how much things have changed.

As little as 20 to 25 years ago, communist Vietnam was consolidating its dominion over Indochina. Indeed, communism then seemed the wave of Southeast Asia's future; and its noncommunist countries were likened to dominoes about to fall. Maoist China was fanatical, revolutionary, autarkic and appallingly repressive -- while on the Korean Peninsula, the north and south were at daggers drawn.

East Asia's relative stability in our time is owed largely to a convergence of state aims. With the exception of North Korea and Myanmar, every country in the region has made economic development its paramount goal. National leaderships have turned away from the ideology and partisanship of the Cold War.

And the key influence on regional stability has been the market economy -- which East Asian countries have adopted, together with its culture of private property and entrepreneurial capitalism. The initial results have been growth rates unprecedented in economic history -- and dramatic reductions in regional poverty.

As growth quickened, middle classes appeared and civil societies began to form. And, just as early capitalism had overthrown feudalism in Western Europe, so did the open economy impose restraints on political arbitrariness. Thus, fledgling democracies have emerged in South Korea, Taiwan, Thailand and -- most recently -- in Indonesia. In China, Maoism has softened into a kind of authoritarianism not too unlike the model familiar to most East Asians.

But, human nature being what it is, economic prosperity has not produced a millennial bliss. New wealth has sometimes stimulated chauvinism; and "rogue" states still loom like ghosts at the feasts of the prosperous.

Thus, it is only right that regional associations like the Association of Southeast Nations (ASEAN), the Institute of Strategic and International Studies and its collaborators represented here should redouble their efforts to tighten the bonds between economic development and regional security. It is fitting that we should strive constantly to strengthen the economic and political dimensions of regional cooperation.

We must ensure the interaction of the free market and free politics continues to stimulate the growth of our economies and to expand the boundaries of freedom in East Asia.

Our need to strengthen the economic dimensions of regional cooperation has been made urgent by the financial crisis that devastated our economies beginning in the middle of 1997.

The East Asian financial crisis has reversed 30 years of economic growth -- the like of which the globe has never seen before. And it forcefully demonstrated to all our countries the dangers inherent in the lack of transparency in our financial systems, the absence of level playing fields in our national economies and the venality of our politics.

The crisis is forcing our economies to become more efficient, more productive and more competitive -- just as it is forcing national politics to become more transparent, more accountable, and more democratic.

How do we organize more transparency in our economic systems? How do we ensure the playing fields of enterprise become more level? Let me recall the national experience with which I am most familiar.

In the Philippines between 1989 and 1998, structural reforms dismantled most of the cartels and monopolies left over from authoritarian rule and the era of protectionism, opened the country to world markets and shifted the country's development strategy to export-based growth.

The reforms also brought down tariff barriers; deregulated key sectors such as telecommunications, transportation and banking; and overhauled the tax system. They reversed economic policies that had been in place for over a generation. For instance, before we opened the financial system to transnational banks in 1994, it had been closed to foreign investors for 46 years!

During the Ramos administration alone between 1992 and 1998, the Philippine Congress passed an unprecedented 229 reform laws. To these reforms the Philippine economy responded vigorously. In 1996 --the year before the financial crisis struck -- gross national product expanded by 7.2 percent.

Throughout today's East Asia, countries are struggling to clean up the cozy relationships between oligarchs and public officials -- the "crony capitalism" that pollutes their corporate cultures.

Where the state is deficient both in the quality of its laws and in their observance and enforcement, officials themselves are able to disobey the rules and directives handed down to them. And these officials often collude with powerful politicians and oligarchic business groups whose conduct they are supposed to regulate.

In such a state, the legal ground constantly shifts, and -- if the price is right -- the rules may change even in the middle of the game.

In such a state, smart investors do not invest in value-adding industries, they invest instead in "the gamble for rule changes", because, if successful, they can gain windfall profits that exceed any possible return on a legitimate investment.

Political and economic reformers may rail against crony capitalism all they want. But it won't disappear until East Asian states become stronger, more efficient and more effective than they are now. For as long as the rules can be stretched to benefit interest groups, then resources and talent will be invested in get-rich-quick schemes.

Eventually -- as we saw most recently in Indonesia -- collusion, corruption, and nepotism paralyze the country's productive capacity. Over time, corruption becomes systemic, affecting the whole of national society. Ultimately, the people rise up and overthrow the regime -- in a resolution that has been played out in East Asia over and over again.

To reduce collusion between officials and oligarchs, the basic remedy is to remove the discretionary powers that enable bureaucrats to choose 'winners' and 'losers' in the economy -- powers that belong properly to the free market.

This means groups like ours must work to carry on the deregulation of the East Asian economies. We must get government out of business and off the backs of business people. This means privatization and focusing the State only on the things it can do, which is providing the political stability, the level playing field, the infrastructure both physical and human; and the rule of law that businesspeople need to generate jobs, create wealth and build up the nation's international competitiveness.

Over this past generation, the economies of the East Asian states have worked increasingly in synergy. Intra-regional trade is becoming the primary impetus for national growth. For instance, the Association of Southeast Asian Nations replaced the United States as Thailand's main export market in 1994; and some 5 percent of China's foreign trade is now carried on with Southeast and Northeast Asia.

And although the ASEAN Free Trade Area (AFTA) does not go into full swing until the year 2002, it has already stimulated intra- ASEAN trade -- which by 1995 had multiplied by almost 50 percent over that in 1993, the first year of AFTA's effectivity.

Intra-regional trade should get even more of a boost from the wider East Asian Free Trade Area, which ASEAN is exploring with China, Japan and South Korea. Visions of an East Asian currency and an East Asian parliament are also being floated. Like all great dreams, these visions must still be given tangible form by statesmen through lengthy negotiations. But they represent an economic and political ideal for the East Asian peoples to work toward.

The writer is a former National Security Adviser of the Philippines.